Finance executives warn Washington not to risk a government default

WASHINGTON — To Wall Street, the partial government shutdown is another unfortunate economic speed bump caused by partisan political fighting.

Failure to raise the debt limit, triggering a first-ever federal default, would be a brick wall on the road to recovery.

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"There's precedent for a government shutdown. There's no precedent for default," Goldman Sachs Chief Executive Lloyd Blankfein told reporters after he and 14 other financial industry executives met with President Obama at the White House on Wednesday.

"We're the most important economy in the world. We're the reserve currency of the world," Blankfein said. "Payments have to go out to people. If money doesn't flow in, money doesn't flow out."

The fiscal standoff between Democrats and Republicans in Washington has Wall Street executives and investors nervous as the Oct. 17 deadline for raising the nation's $16.7-trillion debt limit approaches.

Investors generally don't think the government shutdown, at least at this point, will be a big hit to the economy. And global financial markets seem to have largely shrugged it off so far.

But the prospect of the U.S. government defaulting on its debts raises far more serious risks, said Tom Lee, chief U.S. equity strategist at JPMorgan Chase & Co.

"There would be quite a lot of panic," he said.

Douglas Cote, chief market strategist for ING Investment Management U.S. in New York, put it another way. He said politicians were playing "a form of Russian roulette with a loaded gun."

Obama said that the threat of default made this not just another partisan Washington fight, and that Wall Street executives were right to be worried.

"I think they should be concerned," Obama told CNBC-TV in an interview Wednesday. "When you have a situation in which a faction is willing potentially to default on U.S. obligations, then we are in trouble."

With no compromise in sight, Blankfein, JPMorgan Chief Executive Jamie Dimon, Bank of America Chief Executive Brian Moynihan and others went to Washington and warned politicians not to risk damage to the still-fragile economy.

Their trip came amid a fresh sign that the economic recovery was still struggling to gain traction.

September's job growth was an improvement over the previous month, but only because the company revised its August figure significantly down to 159,000 from the initially reported 176,000.

"The job market appears to have softened in recent months," said Mark Zandi, chief economist at Moody's Analytics, which assists ADP with its monthly report.

Normally, the ADP numbers are just a prelude to the government's all-important monthly read on job creation and the unemployment rate. But the federal government shutdown probably will delay the Labor Department's September jobs report, which is supposed to be released Friday.

The shutdown probably won't have a significant effect on the economy unless it extends into next week, when it could start to unnerve investors, Zandi said.

At that point, the standoff would start getting dangerously close to Oct. 17. That's the date that Treasury Secretary Jacob J. Lew has said the government would run out of borrowing authority and would have only $30 billion on hand to pay bills of as much as $60 billion on any given day.

A government default would cause severe economic harm and push the nation back into recession, Zandi said.

"If they can't get it together by Oct. 17 and we hit the debt limit, then policymakers will have opened an economic Pandora's box," he said. "It would be just a mess and it would be very difficult to staunch the unraveling economy at that point."

Chris Krueger, a senior policy analyst at financial services firm Guggenheim Partners in Washington, said Wednesday that there was a 40% chance Congress would not pass a debt limit increase by Oct. 17.

Blankfein and Moynihan emphasized that they were not taking sides in the partisan fight that triggered the shutdown.

The group of executives, all members of the Financial Services Forum trade association, also met Wednesday with the No. 3 House Republican, Rep. Kevin McCarthy (R-Bakersfield), and Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee.

But Blankfein backed Obama's position that Republicans should not be withholding an increase in the debt limit as part of negotiations over spending and the new healthcare law.

"You can litigate these policy issues, you can relitigate these policy issues in a political forum, but you shouldn't use the threat of causing the U.S. to fail on its obligations to repay the debt as a cudgel," Blankfein said.

House Speaker John Boehner (R-Ohio) said past debt-limit increases have been part of broad spending agreements. But Obama has said he will not negotiate on the debt limit, which Congress has the responsibility to raise to pay for spending it already authorized.

Moynihan said failing to raise the debt limit would be more damaging than the government shutdown, noting the financial market turmoil and economic hit that accompanied the last major fight over the issue, in 2011.

"There's no debate that the seriousness of the U.S. not paying its debts, whether it's Social Security checks, small business loans … all the way up to the Treasury notes and bills, is the most serious thing we have," Moynihan said after the meeting.